Cheniere Energy, Inc. - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-16383

CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware | 95-4352386 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
700 Milam Street, Suite 1900
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 375-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $ 0.003 par value | LNG | NYSE American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 25, 2019, the issuer had 254,750,996 shares of Common Stock outstanding.
CHENIERE ENERGY, INC.
TABLE OF CONTENTS
i
DEFINITIONS
As used in this quarterly report, the terms listed below have the following meanings:
Common Industry and Other Terms
Bcf | billion cubic feet | |
Bcf/d | billion cubic feet per day | |
Bcf/yr | billion cubic feet per year | |
Bcfe | billion cubic feet equivalent | |
DOE | U.S. Department of Energy | |
EPC | engineering, procurement and construction | |
FERC | Federal Energy Regulatory Commission | |
FTA countries | countries with which the United States has a free trade agreement providing for national treatment for trade in natural gas | |
GAAP | generally accepted accounting principles in the United States | |
Henry Hub | the final settlement price (in USD per MMBtu) for the New York Mercantile Exchange’s Henry Hub natural gas futures contract for the month in which a relevant cargo’s delivery window is scheduled to begin | |
LIBOR | London Interbank Offered Rate | |
LNG | liquefied natural gas, a product of natural gas that, through a refrigeration process, has been cooled to a liquid state, which occupies a volume that is approximately 1/600th of its gaseous state | |
MMBtu | million British thermal units, an energy unit | |
mtpa | million tonnes per annum | |
non-FTA countries | countries with which the United States does not have a free trade agreement providing for national treatment for trade in natural gas and with which trade is permitted | |
SEC | U.S. Securities and Exchange Commission | |
SPA | LNG sale and purchase agreement | |
TBtu | trillion British thermal units, an energy unit | |
Train | an industrial facility comprised of a series of refrigerant compressor loops used to cool natural gas into LNG | |
TUA | terminal use agreement |
1
Abbreviated Legal Entity Structure
The following diagram depicts our abbreviated legal entity structure as of September 30, 2019, including our ownership of certain subsidiaries, and the references to these entities used in this quarterly report:

Unless the context requires otherwise, references to “Cheniere,” the “Company,” “we,” “us” and “our” refer to Cheniere Energy, Inc. and its consolidated subsidiaries, including our publicly traded subsidiary, Cheniere Partners.
Unless the context requires otherwise, references to the “CCH Group” refer to CCH HoldCo II, CCH HoldCo I, CCH, CCL and CCP, collectively.
2
PART I. | FINANCIAL INFORMATION |
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (1)
(in millions, except share data)
September 30, | December 31, | ||||||
2019 | 2018 | ||||||
ASSETS | (unaudited) | ||||||
Current assets | |||||||
Cash and cash equivalents | $ | 2,539 | $ | 981 | |||
Restricted cash | 578 | 2,175 | |||||
Accounts and other receivables | 507 | 585 | |||||
Inventory | 288 | 316 | |||||
Derivative assets | 140 | 63 | |||||
Other current assets | 133 | 114 | |||||
Total current assets | 4,185 | 4,234 | |||||
Property, plant and equipment, net | 29,490 | 27,245 | |||||
Operating lease assets, net | 493 | — | |||||
Debt issuance costs, net | 50 | 72 | |||||
Non-current derivative assets | 123 | 54 | |||||
Goodwill | 77 | 77 | |||||
Other non-current assets, net | 287 | 305 | |||||
Total assets | $ | 34,705 | $ | 31,987 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities | |||||||
Accounts payable | $ | 50 | $ | 58 | |||
Accrued liabilities | 1,199 | 1,169 | |||||
Current debt | 11 | 239 | |||||
Deferred revenue | 171 | 139 | |||||
Current operating lease liabilities | 275 | — | |||||
Derivative liabilities | 181 | 128 | |||||
Other current liabilities | 5 | 9 | |||||
Total current liabilities | 1,892 | 1,742 | |||||
Long-term debt, net | 30,795 | 28,179 | |||||
Non-current operating lease liabilities | 203 | — | |||||
Non-current finance lease liabilities | 58 | 57 | |||||
Non-current derivative liabilities | 245 | 22 | |||||
Other non-current liabilities | 26 | 58 | |||||
Commitments and contingencies (see Note 17) | |||||||
Stockholders’ equity | |||||||
Preferred stock, $0.0001 par value, 5.0 million shares authorized, none issued | — | — | |||||
Common stock, $0.003 par value, 480.0 million shares authorized | |||||||
Issued: 270.6 million shares at September 30, 2019 and 269.8 million shares at December 31, 2018 | |||||||
Outstanding: 255.0 million shares at September 30, 2019 and 257.0 million shares at December 31, 2018 | 1 | 1 | |||||
Treasury stock: 15.6 million shares and 12.8 million shares at September 30, 2019 and December 31, 2018, respectively, at cost | (584 | ) | (406 | ) | |||
Additional paid-in-capital | 4,130 | 4,035 | |||||
Accumulated deficit | (4,447 | ) | (4,156 | ) | |||
Total stockholders’ deficit | (900 | ) | (526 | ) | |||
Non-controlling interest | 2,386 | 2,455 | |||||
Total equity | 1,486 | 1,929 | |||||
Total liabilities and equity | $ | 34,705 | $ | 31,987 |
(1) | Amounts presented include balances held by our consolidated variable interest entity (“VIE”), Cheniere Partners, as further discussed in Note 8— Non-controlling Interest and Variable Interest Entity. As of September 30, 2019, total assets and liabilities of Cheniere Partners, which are included in our Consolidated Balance Sheets, were $19.0 billion and $18.6 billion, respectively, including $1.7 billion of cash and cash equivalents and $0.2 billion of restricted cash. |
The accompanying notes are an integral part of these consolidated financial statements.
3
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues | |||||||||||||||
LNG revenues | $ | 2,059 | $ | 1,719 | $ | 6,375 | $ | 5,327 | |||||||
Regasification revenues | 66 | 66 | 199 | 196 | |||||||||||
Other revenues | 45 | 34 | 149 | 81 | |||||||||||
Total revenues | 2,170 | 1,819 | 6,723 | 5,604 | |||||||||||
Operating costs and expenses | |||||||||||||||
Cost of sales (excluding depreciation and amortization expense shown separately below) | 1,267 | 1,027 | 3,758 | 3,078 | |||||||||||
Operating and maintenance expense | 308 | 170 | 824 | 457 | |||||||||||
Development expense | 2 | 2 | 6 | 6 | |||||||||||
Selling, general and administrative expense | 72 | 74 | 222 | 214 | |||||||||||
Depreciation and amortization expense | 213 | 113 | 561 | 333 | |||||||||||
Impairment expense and loss on disposal of assets | 1 | 8 | 7 | 8 | |||||||||||
Total operating costs and expenses | 1,863 | 1,394 | 5,378 | 4,096 | |||||||||||
Income from operations | 307 | 425 | 1,345 | 1,508 | |||||||||||
Other income (expense) | |||||||||||||||
Interest expense, net of capitalized interest | (395 | ) | (221 | ) | (1,014 | ) | (653 | ) | |||||||
Loss on modification or extinguishment of debt | (27 | ) | (12 | ) | (27 | ) | (27 | ) | |||||||
Derivative gain (loss), net | (78 | ) | 23 | (187 | ) | 132 | |||||||||
Other income (expense) | (70 | ) | 15 | (38 | ) | 32 | |||||||||
Total other expense | (570 | ) | (195 | ) | (1,266 | ) | (516 | ) | |||||||
Income (loss) before income taxes and non-controlling interest | (263 | ) | 230 | 79 | 992 | ||||||||||
Income tax benefit (provision) | 3 | (3 | ) | — | (15 | ) | |||||||||
Net income (loss) | (260 | ) | 227 | 79 | 977 | ||||||||||
Less: net income attributable to non-controlling interest | 58 | 162 | 370 | 573 | |||||||||||
Net income (loss) attributable to common stockholders | $ | (318 | ) | $ | 65 | $ | (291 | ) | $ | 404 | |||||
Net income (loss) per share attributable to common stockholders—basic (1) | $ | (1.25 | ) | $ | 0.26 | $ | (1.13 | ) | $ | 1.67 | |||||
Net income (loss) per share attributable to common stockholders—diluted (1) | $ | (1.25 | ) | $ | 0.26 | $ | (1.13 | ) | $ | 1.65 | |||||
Weighted average number of common shares outstanding—basic | 256.0 | 247.2 | 256.8 | 241.9 | |||||||||||
Weighted average number of common shares outstanding—diluted | 256.0 | 250.2 | 256.8 | 244.6 |
(1) Earnings per share in the table may not recalculate exactly due to rounding because it is calculated based on whole numbers, not the rounded numbers presented.
The accompanying notes are an integral part of these consolidated financial statements.
4
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
Three and Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
Total Stockholders’ Equity | |||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||
Shares | Par Value Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2018 | 257.0 | $ | 1 | 12.8 | $ | (406 | ) | $ | 4,035 | $ | (4,156 | ) | $ | 2,455 | $ | 1,929 | |||||||||||||
Vesting of restricted stock units | 0.6 | — | — | — | — | — | — | — | |||||||||||||||||||||
Share-based compensation | — | — | — | — | 28 | — | — | 28 | |||||||||||||||||||||
Shares withheld from employees related to share-based compensation, at cost | (0.2 | ) | — | 0.2 | (12 | ) | — | — | — | (12 | ) | ||||||||||||||||||
Net income attributable to non-controlling interest | — | — | — | — | — | — | 196 | 196 | |||||||||||||||||||||
Distributions and dividends to non-controlling interest | — | — | — | — | — | — | (144 | ) | (144 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | 141 | — | 141 | |||||||||||||||||||||
Balance at March 31, 2019 | 257.4 | 1 | 13.0 | (418 | ) | 4,063 | (4,015 | ) | 2,507 | 2,138 | |||||||||||||||||||
Vesting of restricted stock units | 0.1 | — | — | — | — | — | — | — | |||||||||||||||||||||
Share-based compensation | — | — | — | — | 33 | — | — | 33 | |||||||||||||||||||||
Shares withheld from employees related to share-based compensation, at cost | — | — | — | (2 | ) | — | — | — | (2 | ) | |||||||||||||||||||
Shares repurchased, at cost | — | — | — | (3 | ) | — | — | — | (3 | ) | |||||||||||||||||||
Net income attributable to non-controlling interest | — | — | — | — | — | — | 116 | 116 | |||||||||||||||||||||
Equity portion of convertible notes, net | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||
Distributions and dividends to non-controlling interest | — | — | — | — | — | — | (146 | ) | (146 | ) | |||||||||||||||||||
Net loss | — | — | — | — | — | (114 | ) | — | (114 | ) | |||||||||||||||||||
Balance at June 30, 2019 | 257.5 | 1 | 13.0 | (423 | ) | 4,097 | (4,129 | ) | 2,477 | 2,023 | |||||||||||||||||||
Vesting of restricted stock units | 0.1 | — | — | — | — | — | — | — | |||||||||||||||||||||
Share-based compensation | — | — | — | — | 33 | — | — | 33 | |||||||||||||||||||||
Shares withheld from employees related to share-based compensation, at cost | (0.1 | ) | — | 0.1 | (5 | ) | — | — | — | (5 | ) | ||||||||||||||||||
Shares repurchased, at cost | (2.5 | ) | — | 2.5 | (156 | ) | — | — | — | (156 | ) | ||||||||||||||||||
Net income attributable to non-controlling interest | — | — | — | — | — | — | 58 | 58 | |||||||||||||||||||||
Distributions and dividends to non-controlling interest | — | — | — | — | — | — | (149 | ) | (149 | ) | |||||||||||||||||||
Net loss | — | — | — | — | — | (318 | ) | — | (318 | ) | |||||||||||||||||||
Balance at September 30, 2019 | 255.0 | $ | 1 | 15.6 | $ | (584 | ) | $ | 4,130 | $ | (4,447 | ) | $ | 2,386 | $ | 1,486 |
The accompanying notes are an integral part of these consolidated financial statements.
5
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED
(in millions)
(unaudited)
Three and Nine Months Ended September 30, 2018 | |||||||||||||||||||||||||||||
Total Stockholders’ Equity | |||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||
Shares | Par Value Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at December 31, 2017 | 237.6 | $ | 1 | 12.5 | $ | (386 | ) | $ | 3,248 | $ | (4,627 | ) | $ | 3,004 | $ | 1,240 | |||||||||||||
Vesting of restricted stock units | 0.3 | — | — | — | — | — | — | — | |||||||||||||||||||||
Share-based compensation | — | — | — | — | 16 | — | — | 16 | |||||||||||||||||||||
Shares withheld from employees related to share-based compensation, at cost | — | — | 0.1 | (6 | ) | — | — | — | (6 | ) | |||||||||||||||||||
Net income attributable to non-controlling interest | — | — | — | — | — | — | 243 | 243 | |||||||||||||||||||||
Distributions and dividends to non-controlling interest | — | — | — | — | — | — | (143 | ) | (143 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | 357 | — | 357 | |||||||||||||||||||||
Balance at March 31, 2018 | 237.9 | 1 | 12.6 | (392 | ) | 3,264 | (4,270 | ) | 3,104 | 1,707 | |||||||||||||||||||
Issuance of stock to acquire additional interest in Cheniere Holdings | 10.3 | — | — | — | 376 | — | (376 | ) | — | ||||||||||||||||||||
Share-based compensation | — | — | — | — | 23 | — | — | 23 | |||||||||||||||||||||
Shares withheld from employees related to share-based compensation, at cost | (0.1 | ) | — | — | (2 | ) | — | — | — | (2 | ) | ||||||||||||||||||
Net income attributable to non-controlling interest | — | — | — | — | — | — | 168 | 168 | |||||||||||||||||||||
Equity portion of convertible notes, net | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||
Distributions and dividends to non-controlling interest | — | — | — | — | — | — | (145 | ) | (145 | ) | |||||||||||||||||||
Net loss | — | — | — | — | — | (18 | ) | — | (18 | ) | |||||||||||||||||||
Balance at June 30, 2018 | 248.1 | 1 | 12.6 | (394 | ) | 3,664 | (4,288 | ) | 2,751 | 1,734 | |||||||||||||||||||
Vesting of restricted stock units | 0.1 | — | — | — | — | — | — | — | |||||||||||||||||||||
Issuance of stock to acquire additional interest in Cheniere Holdings | 8.9 | — | — | — | 318 | — | (326 | ) | (8 | ) | |||||||||||||||||||
Share-based compensation | — | — | — | — | 26 | — | — | 26 | |||||||||||||||||||||
Shares withheld from employees related to share-based compensation, at cost | — | — | — | (2 | ) | — | — | — | (2 | ) | |||||||||||||||||||
Net income attributable to non-controlling interest | — | — | — | — | — | — | 162 | 162 | |||||||||||||||||||||
Equity portion of convertible notes, net | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||
Distributions and dividends to non-controlling interest | — | — | — | — | — | — | (147 | ) | (147 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | 65 | — | 65 | |||||||||||||||||||||
Balance at September 30, 2018 | 257.1 | $ | 1 | 12.6 | $ | (396 | ) | $ | 4,009 | $ | (4,223 | ) | $ | 2,440 | $ | 1,831 |
The accompanying notes are an integral part of these consolidated financial statements.
6
CHENIERE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended September 30, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 79 | $ | 977 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization expense | 561 | 333 | |||||
Share-based compensation expense | 94 | 89 | |||||
Non-cash interest expense | 122 | 52 | |||||
Amortization of debt issuance costs, deferred commitment fees, premium and discount | 71 | 53 | |||||
Non-cash operating lease costs | 251 | — | |||||
Loss on modification or extinguishment of debt | 27 | 27 | |||||
Total losses on derivatives, net | 22 | 17 | |||||
Net cash provided by (used for) settlement of derivative instruments | 108 | (54 | ) | ||||
Impairment expense and loss on disposal of assets | 7 | 8 | |||||
Loss on equity method investments | 88 | — | |||||
Other | (2 | ) | (5 | ) | |||
Changes in operating assets and liabilities: | |||||||
Accounts and other receivables | (5 | ) | 114 | ||||
Inventory | 35 | (56 | ) | ||||
Other current assets | (45 | ) | (35 | ) | |||
Accounts payable and accrued liabilities | (82 | ) | (23 | ) | |||
Deferred revenue | 33 | 8 | |||||
Operating lease liabilities | (263 | ) | — | ||||
Finance lease liabilities | 1 | — | |||||
Other, net | (10 | ) | (1 | ) | |||
Net cash provided by operating activities | 1,092 | 1,504 | |||||
Cash flows from investing activities | |||||||
Property, plant and equipment, net | (2,587 | ) | (2,712 | ) | |||
Investment in equity method investment | (70 | ) | (25 | ) | |||
Other | (1 | ) | 15 | ||||
Net cash used in investing activities | (2,658 | ) | (2,722 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from issuances of debt | 4,420 | 3,443 | |||||
Repayments of debt | (2,237 | ) | (1,385 | ) | |||
Debt issuance and deferred financing costs | (38 | ) | (53 | ) | |||
Debt extinguishment costs | (4 | ) | (16 | ) | |||
Distributions and dividends to non-controlling interest | (439 | ) | (435 | ) | |||
Payments related to tax withholdings for share-based compensation | (19 | ) | (10 | ) | |||
Repurchase of common stock | (159 | ) | — | ||||
Other | 3 | (7 | ) | ||||
Net cash provided by financing activities | 1,527 | 1,537 | |||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (39 | ) | 319 | ||||
Cash, cash equivalents and restricted cash—beginning of period | 3,156 | 2,613 | |||||
Cash, cash equivalents and restricted cash—end of period | $ | 3,117 | $ | 2,932 |
Balances per Consolidated Balance Sheet:
September 30, 2019 | |||
Cash and cash equivalents | $ | 2,539 | |
Restricted cash | 578 | ||
Total cash, cash equivalents and restricted cash | $ | 3,117 |
The accompanying notes are an integral part of these consolidated financial statements.
7
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION
We are operating and constructing two natural gas liquefaction and export facilities at Sabine Pass and Corpus Christi. The Sabine Pass LNG terminal is located in Cameron Parish, Louisiana, on the Sabine-Neches Waterway less than four miles from the Gulf Coast. Cheniere Partners, through its subsidiary SPL, is operating and constructing six natural gas liquefaction Trains (the “SPL Project”) at the Sabine Pass LNG terminal adjacent to the existing regasification facilities. Trains 1 through 5 are operational and Train 6 is under construction. The Sabine Pass LNG terminal has operational regasification facilities owned by Cheniere Partners’ wholly owned subsidiary, SPLNG, and a 94-mile pipeline owned by Cheniere Partners’ wholly owned subsidiary, CTPL, that interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines.
The Corpus Christi LNG terminal is located near Corpus Christi, Texas and is operated and constructed by our wholly owned subsidiary CCL. We also operate a 23-mile natural gas supply pipeline that interconnects the Corpus Christi LNG terminal with several interstate and intrastate natural gas pipelines (the “Corpus Christi Pipeline” and together with the liquefaction facilities, the “CCL Project”) through our wholly owned subsidiary CCP. The CCL Project is being constructed in stages with the first phase being three Trains (“Phase 1”). The first stage includes Trains 1 and 2, two LNG storage tanks, one complete marine berth and a second partial berth and all of the CCL Project’s necessary infrastructure facilities (“Stage 1”). The second stage includes Train 3, one LNG storage tank and the completion of the second partial berth (“Stage 2”). Trains 1 and 2 are operational and Train 3 is under construction.
Additionally, separate from the CCH Group, we are developing an expansion of the Corpus Christi LNG terminal adjacent to the CCL Project (“Corpus Christi Stage 3”) and filed an application with FERC in June 2018 for seven midscale Trains with an expected aggregate nominal production capacity of approximately 9.5 mtpa and one LNG storage tank.
We remain focused on expansion of our existing sites by leveraging existing infrastructure. We continue to consider development of other projects, including infrastructure projects in support of natural gas supply and LNG demand, which, among other things, will require acceptable commercial and financing arrangements before we make a final investment decision (“FID”).
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Cheniere have been prepared in accordance with GAAP for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2018. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included.
Results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2019.
Recent Accounting Standards
We adopted ASU 2016-02, Leases (Topic 842), and subsequent amendments thereto (“ASC 842”) on January 1, 2019 using the optional transition approach to apply the standard at the beginning of the first quarter of 2019 with no retrospective adjustments to prior periods. The adoption of the standard resulted in the recognition of right-of-use assets and lease liabilities for operating leases of approximately $550 million on our Consolidated Balance Sheets, with no material impact on our Consolidated Statements of Operations or Consolidated Statements of Cash Flows. We have elected the practical expedients to (1) carryforward prior conclusions related to lease identification and classification for existing leases, (2) combine lease and non-lease components of an arrangement for all classes of leased assets, (3) omit short-term leases with a term of 12 months or less from recognition on the balance sheet and (4) carryforward our existing accounting for land easements not previously accounted for as leases. See Note 11—Leases for additional information on our leases following the adoption of this standard.
8
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 2—RESTRICTED CASH
Restricted cash consists of funds that are contractually or legally restricted as to usage or withdrawal and have been presented separately from cash and cash equivalents on our Consolidated Balance Sheets. As of September 30, 2019 and December 31, 2018, restricted cash consisted of the following (in millions):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Current restricted cash | ||||||||
SPL Project | $ | 185 | $ | 756 | ||||
Cheniere Partners and cash held by guarantor subsidiaries | — | 785 | ||||||
CCL Project | 132 | 289 | ||||||
Cash held by our subsidiaries restricted to Cheniere | 261 | 345 | ||||||
Total current restricted cash | $ | 578 | $ | 2,175 |
Pursuant to the accounts agreements entered into with the collateral trustees for the benefit of SPL’s debt holders and CCH’s debt holders, SPL and CCH are required to deposit all cash received into reserve accounts controlled by the collateral trustees. The usage or withdrawal of such cash is restricted to the payment of liabilities related to the SPL Project and the CCL Project (collectively, the “Liquefaction Projects”) and other restricted payments.
The cash held by Cheniere Partners and its guarantor subsidiaries was restricted in use under the terms of the previous $2.8 billion credit facilities (the “2016 CQP Credit Facilities”) and the related depositary agreement governing the extension of credit to Cheniere Partners, but is no longer restricted following the termination of the 2016 CQP Credit Facilities.
NOTE 3—ACCOUNTS AND OTHER RECEIVABLES
As of September 30, 2019 and December 31, 2018, accounts and other receivables consisted of the following (in millions):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Trade receivables | ||||||||
SPL and CCL | $ | 285 | $ | 330 | ||||
Cheniere Marketing | 173 | 205 | ||||||
Other accounts receivable | 49 | 50 | ||||||
Total accounts and other receivables | $ | 507 | $ | 585 |
NOTE 4—INVENTORY
As of September 30, 2019 and December 31, 2018, inventory consisted of the following (in millions):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Natural gas | $ | 20 | $ | 30 | ||||
LNG | 51 | 24 | ||||||
LNG in-transit | 83 | 173 | ||||||
Materials and other | 134 | 89 | ||||||
Total inventory | $ | 288 | $ | 316 |
9
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 5—PROPERTY, PLANT AND EQUIPMENT
As of September 30, 2019 and December 31, 2018, property, plant and equipment, net consisted of the following (in millions):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
LNG terminal costs | ||||||||
LNG terminal and interconnecting pipeline facilities | $ | 27,224 | $ | 13,386 | ||||
LNG site and related costs | 322 | 86 | ||||||
LNG terminal construction-in-process | 3,576 | 14,864 | ||||||
Accumulated depreciation | (1,827 | ) | (1,299 | ) | ||||
Total LNG terminal costs, net | 29,295 | 27,037 | ||||||
Fixed assets and other | ||||||||
Computer and office equipment | 23 | 17 | ||||||
Furniture and fixtures | 22 | 22 | ||||||
Computer software | 106 | 100 | ||||||
Leasehold improvements | 42 | 41 | ||||||
Land | 59 | 59 | ||||||
Other | 20 | 21 | ||||||
Accumulated depreciation | (134 | ) | (111 | ) | ||||
Total fixed assets and other, net | 138 | 149 | ||||||
Assets under finance lease | ||||||||
Tug vessels | 60 | 60 | ||||||
Accumulated depreciation | (3 | ) | (1 | ) | ||||
Total assets under finance lease, net | 57 | 59 | ||||||
Property, plant and equipment, net | $ | 29,490 | $ | 27,245 |
Depreciation expense was $211 million and $112 million during the three months ended September 30, 2019 and 2018, respectively, and $557 million and $331 million during the nine months ended September 30, 2019 and 2018, respectively.
We realize offsets to LNG terminal costs for sales of commissioning cargoes that were earned or loaded prior to the start of commercial operations of the respective Train during the testing phase for its construction. We realized offsets to LNG terminal costs of $99 million and $301 million during the three and nine months ended September 30, 2019, respectively, for sales of commissioning cargoes from the Liquefaction Projects. We did not realize any offsets to LNG terminal costs during the three and nine months ended September 30, 2018.
NOTE 6—DERIVATIVE INSTRUMENTS
We have entered into the following derivative instruments that are reported at fair value:
• | interest rate swaps to hedge the exposure to volatility in a portion of the floating-rate interest payments under CCH’s credit facilities (“CCH Interest Rate Derivatives”) and to hedge against changes in interest rates that could impact anticipated future issuance of debt by CCH (“CCH Interest Rate Forward Start Derivatives”); |
• | commodity derivatives consisting of natural gas supply contracts for the commissioning and operation of the SPL Project, CCL Project and potential future development of Corpus Christi Stage 3 (“Physical Liquefaction Supply Derivatives”) and associated economic hedges (collectively, the “Liquefaction Supply Derivatives”); |
• | financial derivatives to hedge the exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG (“LNG Trading Derivatives”); and |
• | foreign currency exchange (“FX”) contracts to hedge exposure to currency risk associated with both LNG Trading Derivatives and operations in countries outside of the United States (“FX Derivatives”). |
We recognize our derivative instruments as either assets or liabilities and measure those instruments at fair value. None of our derivative instruments are designated as cash flow or fair value hedging instruments, and changes in fair value are recorded within our Consolidated Statements of Operations to the extent not utilized for the commissioning process.
10
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following table shows the fair value of our derivative instruments that are required to be measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, which are classified as derivative assets, non-current derivative assets, derivative liabilities or non-current derivative liabilities in our Consolidated Balance Sheets (in millions):
Fair Value Measurements as of | |||||||||||||||||||||||||||||||
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||||||
CCH Interest Rate Derivatives asset (liability) | $ | — | $ | (104 | ) | $ | — | $ | (104 | ) | $ | — | $ | 18 | $ | — | $ | 18 | |||||||||||||
CCH Interest Rate Forward Start Derivatives liability | — | (68 | ) | — | (68 | ) | — | — | — | — | |||||||||||||||||||||
Liquefaction Supply Derivatives asset (liability) | (11 | ) | (10 | ) | (31 | ) | (52 | ) | 6 | (19 | ) | (29 | ) | (42 | ) | ||||||||||||||||
LNG Trading Derivatives asset (liability) | (8 | ) | 32 | — | 24 | 1 | (25 | ) | — | (24 | ) | ||||||||||||||||||||
FX Derivatives asset | — | 37 | — | 37 | — | 15 | — | 15 |
We value our CCH Interest Rate Derivatives and CCH Interest Rate Forward Start Derivatives using an income-based approach utilizing observable inputs to the valuation model including interest rate curves, risk adjusted discount rates, credit spreads and other relevant data. We value our LNG Trading Derivatives and our Liquefaction Supply Derivatives using a market or option-based approach incorporating present value techniques, as needed, using observable commodity price curves, when available, and other relevant data. We value our FX Derivatives with a market approach using observable FX rates and other relevant data.
The fair value of our Physical Liquefaction Supply Derivatives is predominantly driven by observable and unobservable market commodity prices and, as applicable to our natural gas supply contracts, our assessment of the associated events deriving fair value, including evaluating whether the respective market is available as pipeline infrastructure is developed. The fair value of our Physical Liquefaction Supply Derivatives incorporates risk premiums related to the satisfaction of conditions precedent, such as completion and placement into service of relevant pipeline infrastructure to accommodate marketable physical gas flow. As of September 30, 2019 and December 31, 2018, some of our Physical Liquefaction Supply Derivatives existed within markets for which the pipeline infrastructure was under development to accommodate marketable physical gas flow.
We include a portion of our Physical Liquefaction Supply Derivatives as Level 3 within the valuation hierarchy as the fair value is developed through the use of internal models which incorporate significant unobservable inputs. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks, such as future prices of energy units for unobservable periods, liquidity, volatility and contract duration.
The Level 3 fair value measurements of natural gas positions within our Physical Liquefaction Supply Derivatives could be materially impacted by a significant change in certain natural gas and international LNG prices. The following table includes quantitative information for the unobservable inputs for our Level 3 Physical Liquefaction Supply Derivatives as of September 30, 2019:
Net Fair Value Liability (in millions) | Valuation Approach | Significant Unobservable Input | Significant Unobservable Inputs Range | |||||
Physical Liquefaction Supply Derivatives | $(31) | Market approach incorporating present value techniques | Henry Hub basis spread | $(0.708) - $0.056 | ||||
Option pricing model | International LNG pricing spread, relative to Henry Hub (1) | 105% - 199% |
(1) Spread contemplates U.S. dollar-denominated pricing.
11
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Increases or decreases in basis or pricing spreads, in isolation, would decrease or increase, respectively, the fair value of our Physical Liquefaction Supply Derivatives.
The following table shows the changes in the fair value of our Level 3 Physical Liquefaction Supply Derivatives during the three and nine months ended September 30, 2019 and 2018 (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Balance, beginning of period | $ | 89 | $ | 12 | $ | (29 | ) | $ | 43 | |||||||
Realized and mark-to-market gains (losses): | ||||||||||||||||
Included in cost of sales | (137 | ) | 5 | (139 | ) | (4 | ) | |||||||||
Purchases and settlements: | ||||||||||||||||
Purchases | 17 | 9 | 93 | 14 | ||||||||||||
Settlements | — | 1 | 44 | (27 | ) | |||||||||||
Transfers out of Level 3 (1) | — | (1 | ) | — | — | |||||||||||
Balance, end of period | $ | (31 | ) | $ | 26 | $ | (31 | ) | $ | 26 | ||||||
Change in unrealized gains (losses) relating to instruments still held at end of period | $ | (137 | ) | $ | 5 | $ | (139 | ) | $ | (4 | ) |
(1) Transferred to Level 2 as a result of observable market for the underlying natural gas purchase agreements.
Derivative assets and liabilities arising from our derivative contracts with the same counterparty are reported on a net basis, as all counterparty derivative contracts provide for the unconditional right of set-off in the event of default. The use of derivative instruments exposes us to counterparty credit risk, or the risk that a counterparty will be unable to meet its commitments in instances when our derivative instruments are in an asset position. Additionally, counterparties are at risk that we will be unable to meet our commitments in instances where our derivative instruments are in a liability position. We incorporate both our own nonperformance risk and the respective counterparty’s nonperformance risk in fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, set-off rights and guarantees.
Interest Rate Derivatives
During the nine months ended September 30, 2019, there were no changes to the terms of the CCH Interest Rate Derivatives entered into by CCH to protect against volatility of future cash flows and hedge a portion of the variable interest payments on its credit facility (the “CCH Credit Facility”).
In June and July of 2019, we entered into CCH Interest Rate Forward Start Derivatives to hedge against changes in interest rates that could impact anticipated future issuance of debt by CCH, which is anticipated by the end of 2020.
Cheniere Partners previously had interest rate swaps (“CQP Interest Rate Derivatives” and, collectively with the CCH Interest Rate Derivatives and the CCH Interest Rate Forward Start Derivatives, the “Interest Rate Derivatives”) to hedge a portion of the variable interest payments on its credit facilities, which were terminated in October 2018.
As of September 30, 2019, we had the following Interest Rate Derivatives outstanding:
Initial Notional Amount | Maximum Notional Amount | Effective Date | Maturity Date | Weighted Average Fixed Interest Rate Paid | Variable Interest Rate Received | |||||||
CCH Interest Rate Derivatives | $29 million | $4.7 billion | May 20, 2015 | May 31, 2022 | 2.30% | One-month LIBOR | ||||||
CCH Interest Rate Forward Start Derivatives | $1.5 billion | $1.5 billion | June 30, 2020 | December 31, 2030 | 2.08% | Three-month LIBOR |
12
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following table shows the fair value and location of the Interest Rate Derivatives on our Consolidated Balance Sheets (in millions):
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
CCH Interest Rate Derivatives | CCH Interest Rate Forward Start Derivatives | Total | CCH Interest Rate Derivatives | CCH Interest Rate Forward Start Derivatives | Total | ||||||||||||||||||
Consolidated Balance Sheet Location | |||||||||||||||||||||||
Derivative assets | $ | — | $ | — | $ | — | $ | 10 | $ | — | $ | 10 | |||||||||||
Non-current derivative assets | — | — | — | 8 | — | 8 | |||||||||||||||||
Total derivative assets | — | — | — | 18 | — | 18 | |||||||||||||||||
Derivative liabilities | (30 | ) | (46 | ) | (76 | ) | — | — | — | ||||||||||||||
Non-current derivative liabilities | (74 | ) | (22 | ) | (96 | ) | — | — | — | ||||||||||||||
Total derivative liabilities | (104 | ) | (68 | ) | (172 | ) | — | — | — | ||||||||||||||
Derivative asset (liability), net | $ | (104 | ) | $ | (68 | ) | $ | (172 | ) | $ | 18 | $ | — | $ | 18 |
The following table shows the changes in the fair value and settlements of our Interest Rate Derivatives recorded in derivative gain (loss), net on our Consolidated Statements of Operations during the three and nine months ended September 30, 2019 and 2018 (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
CCH Interest Rate Derivatives gain (loss) | $ | (17 | ) | $ | 21 | $ | (119 | ) | $ | 119 | ||||||
CCH Interest Rate Forward Start Derivatives loss | (61 | ) | — | (68 | ) | — | ||||||||||
CQP Interest Rate Derivatives gain | — | 2 | — | 13 |
Commodity Derivatives
SPL, CCL and CCL Stage III have entered into physical natural gas supply contracts and associated economic hedges to purchase natural gas for the commissioning and operation of the SPL Project, the CCL Project and potential future development of Corpus Christi Stage 3, respectively, which are primarily indexed to the natural gas market and international LNG indices. The terms of the index-based physical natural gas supply contracts range up to approximately 15 years, some of which commence upon the satisfaction of certain events or states of affairs.
We have entered into, and may from time to time enter into, financial LNG Trading Derivatives in the form of swaps, forwards, options or futures to economically hedge exposure to the commodity markets in which we have contractual arrangements to purchase or sell physical LNG. We have entered into LNG Trading Derivatives to secure a fixed price position to minimize future cash flow variability associated with LNG purchase and sale transactions.
13
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following table shows the fair value and location of our Liquefaction Supply Derivatives and LNG Trading Derivatives (collectively, “Commodity Derivatives”) on our Consolidated Balance Sheets (in millions, except notional amount):
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
Liquefaction Supply Derivatives (1) | LNG Trading Derivatives (2) | Total | Liquefaction Supply Derivatives (1) | LNG Trading Derivatives (2) | Total | ||||||||||||||||||
Consolidated Balance Sheet Location | |||||||||||||||||||||||
Derivative assets | $ | 27 | $ | 78 | $ | 105 | $ | 13 | $ | 24 | $ | 37 | |||||||||||
Non-current derivative assets | 120 | 1 | 121 | 46 | — | 46 | |||||||||||||||||
Total derivative assets | 147 | 79 | 226 | 59 | 24 | 83 | |||||||||||||||||
Derivative liabilities | (52 | ) | (53 | ) | (105 | ) | (79 | ) | (48 | ) | (127 | ) | |||||||||||
Non-current derivative liabilities | (147 | ) | (2 | ) | (149 | ) | (22 | ) | — | (22 | ) | ||||||||||||
Total derivative liabilities | (199 | ) | (55 | ) | (254 | ) | (101 | ) | (48 | ) | (149 | ) | |||||||||||
Derivative asset (liability), net | $ | (52 | ) | $ | 24 | $ | (28 | ) | $ | (42 | ) | $ | (24 | ) | $ | (66 | ) | ||||||
Notional amount, net (in TBtu) (3) | 9,455 | 25 | 5,832 | 12 |
(1) | Does not include collateral calls of $20 million and $5 million for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, respectively. Includes derivative assets of $0.1 million and $2 million and non-current assets of $1 million and $3 million as of September 30, 2019 and December 31, 2018, respectively, for a natural gas supply contract CCL has with a related party. |
(2) | Does not include collateral of $20 million and $9 million deposited for such contracts, which are included in other current assets in our Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, respectively. |
(3) | SPL had secured up to approximately 4,108 TBtu and 3,464 TBtu as of September 30, 2019 and December 31, 2018, respectively. CCL had secured up to approximately 3,065 TBtu and 2,801 TBtu of natural gas feedstock through natural gas supply contracts as of September 30, 2019 and December 31, 2018, respectively, of which 122 TBtu and 55 TBtu, respectively, were for a natural gas supply contract CCL has with a related party. CCL Stage III had secured up to approximately 2,361 TBtu of natural gas feedstock through natural gas supply contracts as of September 30, 2019. |
The following table shows the changes in the fair value, settlements and location of our Commodity Derivatives recorded on our Consolidated Statements of Operations during the three and nine months ended September 30, 2019 and 2018 (in millions):
Consolidated Statements of Operations Location (1) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||||
LNG Trading Derivatives gain (loss) | LNG revenues | $ | 22 | $ | (58 | ) | $ | 180 | $ | (128 | ) | ||||||
LNG Trading Derivatives loss | Cost of sales | (17 | ) | — | (68 | ) | — | ||||||||||
Liquefaction Supply Derivatives gain (2) | LNG revenues | — | — | 1 | — | ||||||||||||
Liquefaction Supply Derivatives gain (loss) (2)(3) | Cost of sales | (139 | ) | 21 | — | (32 | ) |
(1) | Fair value fluctuations associated with commodity derivative activities are classified and presented consistently with the item economically hedged and the nature and intent of the derivative instrument. |
(2) | Does not include the realized value associated with derivative instruments that settle through physical delivery. |
(3) | Includes $23 million and $59 million that CCL recorded in cost of sales under a natural gas supply contract with a related party during the three and nine months ended September 30, 2019, respectively. Of this amount, $1 million was included in accrued liabilities as of September 30, 2019. CCL did not have any transactions during the three and nine months ended September 30, 2018 under this contract. |
14
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
FX Derivatives
The following table shows the fair value and location of our FX Derivatives on our Consolidated Balance Sheets (in millions):
Fair Value Measurements as of | |||||||||
Consolidated Balance Sheet Location | September 30, 2019 | December 31, 2018 | |||||||
FX Derivatives | Derivative assets | $ | 35 | $ | 16 | ||||
FX Derivatives | Non-current derivative assets | 2 | — | ||||||
FX Derivatives | Derivative liabilities | — | (1 | ) |
The total notional amount of our FX Derivatives was $745 million and $379 million as of September 30, 2019 and December 31, 2018, respectively.
The following table shows the changes in the fair value, settlements and location of our FX Derivatives recorded on our Consolidated Statements of Operations during the three and nine months ended September 30, 2019 and 2018 (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
Consolidated Statements of Operations Location | 2019 | 2018 | 2019 | 2018 | |||||||||||||
FX Derivatives gain | LNG revenues | $ | 43 | $ | 1 | $ | 52 | $ | 11 |
Consolidated Balance Sheet Presentation
Our derivative instruments are presented on a net basis on our Consolidated Balance Sheets as described above. The following table shows the fair value of our derivatives outstanding on a gross and net basis (in millions):
Gross Amounts Recognized | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts Presented in the Consolidated Balance Sheets | ||||||||||
Offsetting Derivative Assets (Liabilities) | ||||||||||||
As of September 30, 2019 | ||||||||||||
CCH Interest Rate Derivatives | $ | (104 | ) | $ | — | $ | (104 | ) | ||||
CCH Interest Rate Forward Start Derivatives | (68 | ) | — | (68 | ) | |||||||
Liquefaction Supply Derivatives | 175 | (28 | ) | 147 | ||||||||
Liquefaction Supply Derivatives | (208 | ) | 9 | (199 | ) | |||||||
LNG Trading Derivatives | 84 | (5 | ) | 79 | ||||||||
LNG Trading Derivatives | (56 | ) | 1 | (55 | ) | |||||||
FX Derivatives | 45 | (8 | ) | 37 | ||||||||
As of December 31, 2018 | ||||||||||||
CCH Interest Rate Derivatives | $ | 19 | $ | (1 | ) | $ | 18 | |||||
Liquefaction Supply Derivatives | 95 | (36 | ) | 59 | ||||||||
Liquefaction Supply Derivatives | (121 | ) | 20 | (101 | ) | |||||||
LNG Trading Derivatives | 112 | (88 | ) | 24 | ||||||||
LNG Trading Derivatives | (92 | ) | 44 | (48 | ) | |||||||
FX Derivatives | 30 | (14 | ) | 16 | ||||||||
FX Derivatives | (2 | ) | 1 | (1 | ) |
15
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 7—OTHER NON-CURRENT ASSETS
As of September 30, 2019 and December 31, 2018, other non-current assets, net consisted of the following (in millions):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Advances made to municipalities for water system enhancements | $ | 88 | $ | 90 | ||||
Advances and other asset conveyances to third parties to support LNG terminals | 54 | 54 | ||||||
Tax-related payments and receivables | 20 | 21 | ||||||
Equity method investments | 73 | 94 | ||||||
Advances made under EPC and non-EPC contracts | 5 | 14 | ||||||
Other | 47 | 32 | ||||||
Total other non-current assets, net | $ | 287 | $ | 305 |
Equity Method Investments
Our equity method investments consist of interests in privately-held companies. In 2017, we acquired an equity interest in Midship Holdings, LLC (“Midship Holdings”), which manages the business and affairs of Midship Pipeline Company, LLC (“Midship Pipeline”). Midship Pipeline is currently constructing an approximately 200-mile natural gas pipeline project (the “Midship Project”) that connects production in the Anadarko Basin to Gulf Coast markets. Construction of the Midship Project commenced in the first quarter of 2019.
Subsequent to Midship Project obtaining its financing in the form of credit facilities, in conjunction with existing equity, Midship Holdings was designed to finance its activities without additional subordinated financial support. As a result, Midship Holdings is no longer a variable interest entity. We continue to report Midship Holdings as an equity method investment due to our ability to exercise significant influence over the operating and financial policies of Midship Holdings through our non-controlling voting rights on its board of managers.
During the three and nine months ended September 30, 2019, we recognized impairment losses of $87 million relating to our investments in certain equity method investees, including Midship Holdings. Impairments were precipitated primarily by cost overruns and extended construction timelines for operating infrastructure of our investees’ projects, resulting in a reduction of the expected fair value of our equity interests. Impairment losses associated with our equity method investments are presented in other expense (income).
Our investment in Midship Holdings was $70 million, net of impairment losses, and $85 million at September 30, 2019 and December 31, 2018, respectively.
Cheniere LNG O&M Services, LLC (“O&M Services”), our wholly owned subsidiary, provides the development, construction, operation and maintenance services associated with the Midship Project pursuant to agreements in which O&M Services receives an agreed upon fee and reimbursement of costs incurred. O&M Services recorded $2 million and $4 million in the three months ended September 30, 2019 and 2018, respectively, and $9 million and $8 million in the nine months ended September 30, 2019 and 2018, respectively, of other revenues and $2 million and $4 million of accounts receivable as of September 30, 2019 and December 31, 2018, respectively, for services provided to Midship Pipeline under these agreements. CCL has entered into a transportation precedent agreement and a negotiated rate agreement with Midship Pipeline to secure firm pipeline transportation capacity for a period of 10 years following commencement of the Midship Project. In May 2018, CCL issued a letter of credit to Midship Pipeline for drawings up to an aggregate maximum amount of $16 million. Midship Pipeline had not made any drawings on this letter of credit as of September 30, 2019.
NOTE 8—NON-CONTROLLING INTEREST AND VARIABLE INTEREST ENTITY
We own a 48.6% limited partner interest in Cheniere Partners in the form of 104.5 million common units and 135.4 million subordinated units, with the remaining non-controlling interest held by Blackstone CQP Holdco LP and the public. We also own 100% of the general partner interest and the incentive distribution rights in Cheniere Partners. Cheniere Partners is accounted for as a consolidated variable interest entity. See Note 10—Variable Interest Entities of our Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2018 for further information.
16
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following table presents the summarized assets and liabilities (in millions) of Cheniere Partners, our consolidated VIE, which are included in our Consolidated Balance Sheets. The assets in the table below may only be used to settle obligations of Cheniere Partners. In addition, there is no recourse to us for the consolidated VIE’s liabilities. The assets and liabilities in the table below include third-party assets and liabilities of Cheniere Partners only and exclude intercompany balances that eliminate in consolidation.
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,707 | $ | — | ||||
Restricted cash | 185 | 1,541 | ||||||
Accounts and other receivables | 277 | 348 | ||||||
Other current assets | 176 | 125 | ||||||
Total current assets | 2,345 | 2,014 | ||||||
Property, plant and equipment, net | 16,338 | 15,390 | ||||||
Other non-current assets, net | 294 | 228 | ||||||
Total assets | $ | 18,977 | $ | 17,632 | ||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accrued liabilities | $ | 657 | $ | 821 | ||||
Other current liabilities | 221 | 197 | ||||||
Total current liabilities | 878 | 1,018 | ||||||
Long-term debt, net | 17,571 | 16,066 | ||||||
Other non-current liabilities | 120 | 18 | ||||||
Total liabilities | $ | 18,569 | $ | 17,102 |
NOTE 9—ACCRUED LIABILITIES
As of September 30, 2019 and December 31, 2018, accrued liabilities consisted of the following (in millions):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Interest costs and related debt fees | $ | 318 | $ | 233 | ||||
Accrued natural gas purchases | 385 | 610 | ||||||
LNG terminals and related pipeline costs | 329 | 125 | ||||||
Compensation and benefits | 83 | 117 | ||||||
Accrued LNG inventory | 3 | 14 | ||||||
Other accrued liabilities | 81 | 70 | ||||||
Total accrued liabilities | $ | 1,199 | $ | 1,169 |
17
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 10—DEBT
As of September 30, 2019 and December 31, 2018, our debt consisted of the following (in millions):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Long-term debt: | ||||||||
SPL | ||||||||
5.625% Senior Secured Notes due 2021 (“2021 SPL Senior Notes”) | $ | 2,000 | $ | 2,000 | ||||
6.25% Senior Secured Notes due 2022 (“2022 SPL Senior Notes”) | 1,000 | 1,000 | ||||||
5.625% Senior Secured Notes due 2023 (“2023 SPL Senior Notes”) | 1,500 | 1,500 | ||||||
5.75% Senior Secured Notes due 2024 (“2024 SPL Senior Notes”) | 2,000 | 2,000 | ||||||
5.625% Senior Secured Notes due 2025 (“2025 SPL Senior Notes”) | 2,000 | 2,000 | ||||||
5.875% Senior Secured Notes due 2026 (“2026 SPL Senior Notes”) | 1,500 | 1,500 | ||||||
5.00% Senior Secured Notes due 2027 (“2027 SPL Senior Notes”) | 1,500 | 1,500 | ||||||
4.200% Senior Secured Notes due 2028 (“2028 SPL Senior Notes”) | 1,350 | 1,350 | ||||||
5.00% Senior Secured Notes due 2037 (“2037 SPL Senior Notes”) | 800 | 800 | ||||||
Cheniere Partners | ||||||||
5.250% Senior Notes due 2025 (“2025 CQP Senior Notes”) | 1,500 | 1,500 | ||||||
5.625% Senior Notes due 2026 (“2026 CQP Senior Notes”) | 1,100 | 1,100 | ||||||
4.500% Senior Notes due 2029 (“2029 CQP Senior Notes”) | 1,500 | — | ||||||
2016 CQP Credit Facilities | — | — | ||||||
CQP Credit Facilities executed in 2019 (“2019 CQP Credit Facilities”) | — | — | ||||||
CCH | ||||||||
7.000% Senior Secured Notes due 2024 (“2024 CCH Senior Notes”) | 1,250 | 1,250 | ||||||
5.875% Senior Secured Notes due 2025 (“2025 CCH Senior Notes”) | 1,500 | 1,500 | ||||||
5.125% Senior Secured Notes due 2027 (“2027 CCH Senior Notes”) | 1,500 | 1,500 | ||||||
4.80% Senior Secured Notes due 2039 (“4.80% CCH Senior Notes”) | 727 | — | ||||||
CCH Credit Facility | 5,341 | 5,156 | ||||||
CCH HoldCo II | ||||||||
11.0% Convertible Senior Secured Notes due 2025 (“2025 CCH HoldCo II Convertible Senior Notes”) | 1,578 | 1,455 | ||||||
Cheniere | ||||||||
4.875% Convertible Unsecured Notes due 2021 (“2021 Cheniere Convertible Unsecured Notes”) | 1,247 | 1,218 | ||||||
4.25% Convertible Senior Notes due 2045 (“2045 Cheniere Convertible Senior Notes”) | 625 | 625 | ||||||
$1.25 billion Cheniere Revolving Credit Facility (“Cheniere Revolving Credit Facility”) | — | — | ||||||
Unamortized premium, discount and debt issuance costs, net | (723 | ) | (775 | ) | ||||
Total long-term debt, net | 30,795 | 28,179 | ||||||
Current debt: | ||||||||
$1.2 billion SPL Working Capital Facility (“SPL Working Capital Facility”) | — | — | ||||||
$1.2 billion CCH Working Capital Facility (“CCH Working Capital Facility”) | — | 168 | ||||||
Cheniere Marketing trade finance facilities | 11 | 71 | ||||||
Total current debt | 11 | 239 | ||||||
Total debt, net | $ | 30,806 | $ | 28,418 |
2019 Debt Issuances and Terminations
4.80% CCH Senior Notes
In September 2019, CCH issued an aggregate principal amount of $727 million of the 4.80% CCH Senior Notes in a private placement conducted pursuant to Section 4(a)(2) of the Securities Act. The 4.80% CCH Senior Notes were issued under an indenture dated as of September 27, 2019 (the “2019 CCH Indenture”) pursuant to a note purchase agreement with the purchasers party thereto and Allianz Global Investors GmbH, as noteholder consultant, originally entered into in June 2019. The 4.80% CCH Senior Notes are jointly and severally guaranteed by each of CCH’s subsidiaries CCL, CCP and Corpus Christi Pipeline GP, LLC
18
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
(each a “CCH Guarantor” and collectively, the “CCH Guarantors”). The proceeds of the notes were used to prepay a portion of the outstanding balance of the CCH Credit Facility, resulting in the recognition of debt extinguishment costs of $13 million for the three and nine months ended September 30, 2019 relating to the write off of unamortized debt discounts and issuance costs. The 4.80% CCH Senior Notes accrue interest at a fixed rate of 4.80% per annum and are fully amortizing according to a fixed sculpted amortization schedule with semi-annual payments of interest starting December 2019 and semi-annual payments of principal starting June 2027. The 4.80% CCH Senior Notes have a weighted average life of 15 years.
The 4.80% CCH Senior Notes are CCH’s senior secured obligation, ranking senior in right of payment to any and all of CCH’s future indebtedness that is subordinated to the 4.80% CCH Senior Notes and equal in right of payment with CCH’s other existing and future indebtedness that is senior and secured by the same collateral securing the 4.80% CCH Senior Notes. The 4.80% CCH Senior Notes are secured by a first-priority security interest in substantially all of CCH’s and the CCH Guarantors’ assets.
At any time prior to June 30, 2039, CCH may redeem all or a part of the 4.80% CCH Senior Notes at a redemption price equal to the “make-whole” price set forth in the 2019 CCH Indenture, plus accrued and unpaid interest, if any, to the date of redemption. CCH also may at any time on or after June 30, 2039, redeem the 4.80% CCH Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 4.80% CCH Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the date of redemption.
The 2019 CCH Indenture contains customary terms and events of default and certain covenants that, among other things, limit CCH’s ability and the ability of CCH’s restricted subsidiaries to incur additional indebtedness or issue preferred stock, make certain investments or pay dividends or distributions on membership interests or subordinated indebtedness or purchase, redeem or retire membership interests, sell or transfer assets, including membership or partnership interests of CCH’s restricted subsidiaries, restrict dividends or other payments by restricted subsidiaries to CCH or any of CCH’s restricted subsidiaries, incur liens, enter into transactions with affiliates, dissolve, liquidate, consolidate, merge, sell or lease all or substantially all of the properties or assets of CCH and its restricted subsidiaries taken as a whole or permit any CCH Guarantor to dissolve, liquidate, consolidate, merge, sell or lease all or substantially all of its properties and assets. The 2019 CCH Indenture covenants are subject to a number of important limitations and exceptions.
2029 CQP Senior Notes
In September 2019, Cheniere Partners issued an aggregate principal amount of $1.5 billion of the 2029 CQP Senior Notes, which are jointly and severally guaranteed by each of Cheniere Partners’ subsidiaries other than SPL and, subject to certain conditions governing its guarantee, Sabine Pass LP (the “CQP Guarantors”). The proceeds of the offering were used to prepay the outstanding balance of the $750 million term loan under the 2019 CQP Credit Facilities (“CQP Term Facility”) and for general corporate purposes, including funding future capital expenditures in connection with the construction of Train 6 at the SPL Project, resulting in the recognition of debt modification and extinguishment costs of $13 million for the three and nine months ended September 30, 2019. As of September 30, 2019, only the $750 million revolving credit facility (“CQP Revolving Facility”), all of which is undrawn, remains as part of the 2019 CQP Credit Facilities.
Borrowings under the 2029 CQP Senior Notes accrue interest at a fixed rate of 4.500% per annum, and interest on the 2029 CQP Senior Notes is payable semi-annually in cash in arrears. The 2029 CQP Senior Notes are governed by the same base indenture as the 2025 CQP Senior Notes and the 2026 CQP Senior Notes (the “CQP Base Indenture”) and are further governed by the Third Supplemental Indenture (together with the CQP Base Indenture, the “2029 CQP Notes Indenture”), which contains customary terms and events of default and certain covenants that, among other things, limit the ability of Cheniere Partners and the CQP Guarantors to incur liens and sell assets, enter into transactions with affiliates, enter into sale-leaseback transactions and consolidate, merge or sell, lease or otherwise dispose of all or substantially all of the applicable entity’s properties or assets.
At any time prior to October 1, 2024, Cheniere Partners may redeem all or a part of the 2029 CQP Senior Notes at a redemption price equal to 100% of the aggregate principal amount of the 2029 CQP Senior Notes redeemed, plus the “applicable premium” set forth in the 2029 CQP Notes Indenture, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to October 1, 2022, Cheniere Partners may redeem up to 35% of the aggregate principal amount of the 2029 CQP Senior Notes with an amount of cash not greater than the net cash proceeds from certain equity offerings at a redemption price equal to 104.5% of the aggregate principal amount of the 2029 CQP Senior Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption. At any time on or after October 1, 2024 through the maturity date of October 1, 2029, Cheniere
19
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Partners may redeem the 2029 CQP Senior Notes, in whole or in part, at the redemption prices set forth in the 2029 CQP Notes Indenture.
The 2025 CQP Senior Notes, the 2026 CQP Senior Notes and the 2029 CQP Senior Notes (collectively, the “CQP Senior Notes”) are Cheniere Partners’ senior obligations, ranking equally in right of payment with Cheniere Partners’ other existing and future unsubordinated debt and senior to any of its future subordinated debt. In the event that the aggregate amount of Cheniere Partners’ secured indebtedness and the secured indebtedness of the CQP Guarantors (other than the CQP Senior Notes or any other series of notes issued under the CQP Base Indenture) outstanding at any one time exceeds the greater of (1) $1.5 billion and (2) 10% of net tangible assets, the CQP Senior Notes will be secured to the same extent as such obligations under the 2019 CQP Credit Facilities. The obligations under the 2019 CQP Credit Facilities are secured on a first-priority basis (subject to permitted encumbrances) with liens on (1) substantially all the existing and future tangible and intangible assets and rights of Cheniere Partners and the CQP Guarantors and equity interests in the CQP Guarantors (except, in each case, for certain excluded properties set forth in the 2019 CQP Credit Facilities) and (2) substantially all of the real property of SPLNG (except for excluded properties referenced in the 2019 CQP Credit Facilities). The liens securing the CQP Senior Notes, if applicable, will be shared equally and ratably (subject to permitted liens) with the holders of other senior secured obligations, which include the 2019 CQP Credit Facilities obligations and any future additional senior secured debt obligations.
In connection with the closing of the 2029 CQP Senior Notes offering, Cheniere Partners and the CQP Guarantors entered into a registration rights agreement (the “CQP Registration Rights Agreement”). Under the CQP Registration Rights Agreement, Cheniere Partners and the CQP Guarantors have agreed to file with the SEC and cause to become effective a registration statement relating to an offer to exchange any and all of the 2029 CQP Senior Notes for a like aggregate principal amount of debt securities of Cheniere Partners with terms identical in all material respects to the 2029 CQP Senior Notes sought to be exchanged (other than with respect to restrictions on transfer or to any increase in annual interest rate), within 360 days after the notes issuance date of September 12, 2019. Under specified circumstances, Cheniere Partners and the CQP Guarantors have also agreed to cause to become effective a shelf registration statement relating to resales of the 2029 CQP Senior Notes. Cheniere Partners will be obligated to pay additional interest on the 2029 CQP Senior Notes if it fails to comply with its obligation to register the 2029 CQP Senior Notes within the specified time period.
2016 CQP Credit Facilities
In May 2019, the remaining commitments under the 2016 CQP Credit Facilities were terminated. There were no write-offs of debt issuance costs associated with the termination of the 2016 CQP Credit Facilities.
2019 CQP Credit Facilities
In May 2019, Cheniere Partners entered into the 2019 CQP Credit Facilities, which consisted of the $750 million CQP Term Facility, which was prepaid and terminated upon issuance of the 2029 CQP Senior Notes in September 2019, and the $750 million CQP Revolving Facility. Borrowings under the 2019 CQP Credit Facilities will be used to fund the development and construction of Train 6 of the SPL Project and for general corporate purposes, subject to a sublimit, and the 2019 CQP Credit Facilities are also available for the issuance of letters of credit.
Loans under the 2019 CQP Credit Facilities accrue interest at a variable rate per annum equal to LIBOR or the base rate (equal to the highest of the prime rate, the federal funds effective rate, as published by the Federal Reserve Bank of New York, plus 0.50%, and the adjusted one-month LIBOR plus 1.0%), plus the applicable margin. Under the CQP Term Facility, the applicable margin for LIBOR loans was 1.50% per annum, and the applicable margin for base rate loans was 0.50% per annum. Under the CQP Revolving Facility, the applicable margin for LIBOR loans is 1.25% to 2.125% per annum, and the applicable margin for base rate loans is 0.25% to 1.125% per annum, in each case depending on the then-current rating of Cheniere Partners. Interest on LIBOR loans is due and payable at the end of each applicable LIBOR period (and at the end of every three-month period within the LIBOR period, if any), and interest on base rate loans is due and payable at the end of each calendar quarter.
The 2019 CQP Credit Facilities mature on May 29, 2024. Any outstanding balance may be repaid, in whole or in part, at any time without premium or penalty, except for interest rate breakage costs. The 2019 CQP Credit Facilities contain conditions precedent for extensions of credit, as well as customary affirmative and negative covenants, and limit Cheniere Partners’ ability to make restricted payments, including distributions, to once per fiscal quarter and one true-up per fiscal quarter as long as certain conditions are satisfied.
20
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The 2019 CQP Credit Facilities are unconditionally guaranteed and secured by a first priority lien (subject to permitted encumbrances) on substantially all of Cheniere Partners’ and the CQP Guarantors’ existing and future tangible and intangible assets and rights and equity interests in the CQP Guarantors (except, in each case, for certain excluded properties set forth in the 2019 CQP Credit Facilities).
CCH Credit Facility
As part of the capital allocation framework announced in June 2019, we prepaid $70 million of outstanding borrowings under the CCH Credit Facility during the three and nine months ended September 30, 2019. The prepayment resulted in the recognition of debt extinguishment costs of $1 million for the three and nine months ended September 30, 2019.
Credit Facilities
Below is a summary of our credit facilities outstanding as of September 30, 2019 (in millions):
SPL Working Capital Facility (1) | 2019 CQP Credit Facilities | CCH Credit Facility | CCH Working Capital Facility | Cheniere Revolving Credit Facility | ||||||||||||||||
Original facility size | $ | 1,200 | $ | 1,500 | $ | 8,404 | $ | 350 | $ | 750 | ||||||||||
Incremental commitments | — | — | 1,566 | 850 | 500 | |||||||||||||||
Less: | ||||||||||||||||||||
Outstanding balance | — | — | 5,341 | — | — | |||||||||||||||
Commitments prepaid or terminated | — | 750 | 4,629 | — | — | |||||||||||||||
Letters of credit issued | 414 | — | — | 583 | 876 | |||||||||||||||
Available commitment | $ | 786 | $ | 750 | $ | — | $ | 617 | $ | 374 | ||||||||||
Interest rate on available balance | LIBOR plus 1.75% or base rate plus 0.75% | LIBOR plus 1.25% - 2.125% or base rate plus 0.25% - 1.125% | LIBOR plus 1.75% or base rate plus 0.75% | LIBOR plus 1.25% - 1.75% or base rate plus 0.25% - 0.75% | LIBOR plus 1.75% - 2.50% or base rate plus 0.75% - 1.50% | |||||||||||||||
Weighted average interest rate of outstanding balance | n/a | n/a | 3.79% | n/a | n/a | |||||||||||||||
Maturity date | December 31, 2020 | May 29, 2024 | June 30, 2024 | June 29, 2023 | December 23, 2022 |
(1) | The SPL Working Capital Facility was amended in May 2019 in connection with commercialization and financing of Train 6 of the SPL Project. All terms of the SPL Working Capital Facility substantially remained unchanged. |
21
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Convertible Notes
Below is a summary of our convertible notes outstanding as of September 30, 2019 (in millions):
2021 Cheniere Convertible Unsecured Notes | 2025 CCH HoldCo II Convertible Senior Notes | 2045 Cheniere Convertible Senior Notes | ||||||||||
Aggregate original principal | $ | 1,000 | $ | 1,000 | $ | 625 | ||||||
Debt component, net of discount and debt issuance costs | $ | 1,181 | $ | 1,564 | $ | 312 | ||||||
Equity component | $ | 210 | $ | — | $ | 194 | ||||||
Interest payment method | Paid-in-kind | Paid-in-kind / cash (1) | Cash | |||||||||
Conversion by us (2) | — | (3) | (4) | |||||||||
Conversion by holders (2) | (5) | (6) | (7) | |||||||||
Conversion basis | Cash and/or stock | Stock | Cash and/or stock | |||||||||
Conversion value in excess of principal | $ | — | $ | — | $ | — | ||||||
Maturity date | May 28, 2021 | May 13, 2025 | March 15, 2045 | |||||||||
Contractual interest rate | 4.875 | % | 11.0 | % | 4.25 | % | ||||||
Effective interest rate (8) | 8.4 | % | 12.0 | % | 9.4 | % | ||||||
Remaining debt discount and debt issuance costs amortization period (9) | 1.7 years | 1.0 years | 25.5 years |
(1) | Prior to the substantial completion of Train 2 of the CCL Project, interest was paid entirely in kind. Following substantial completion, the interest generally must be paid in cash; however, a portion of the interest may be paid in kind under certain specified circumstances. |
(2) | Conversion is subject to various limitations and conditions. |
(3) | Convertible on or after March 1, 2020, provided that our market capitalization is not less than $10.0 billion (“Eligible Conversion Date”). The conversion price is the lower of (1) a 10% discount to the average of the daily volume-weighted average price (“VWAP”) of our common stock for the 90 trading day period prior to the date notice is provided, and (2) a 10% discount to the closing price of our common stock on the trading day preceding the date notice is provided. |
(4) | Redeemable at any time after March 15, 2020 at a redemption price payable in cash equal to the accreted amount of the 2045 Cheniere Convertible Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to such redemption date. |
(5) | Initially convertible at $93.64 (subject to adjustment upon the occurrence of certain specified events), provided that the closing price of our common stock is greater than or equal to the conversion price on the conversion date. |
(6) | Convertible on or after the six-month anniversary of the Eligible Conversion Date, provided that our total market capitalization is not less than $10.0 billion, at a price equal to the average of the daily VWAP of our common stock for the 90 trading day period prior to the date on which notice of conversion is provided. |
(7) | Prior to December 15, 2044, convertible only under certain circumstances as specified in the indenture; thereafter, holders may convert their notes regardless of these circumstances. The conversion rate will initially equal 7.2265 shares of our common stock per $1,000 principal amount of the 2045 Cheniere Convertible Senior Notes, which corresponds to an initial conversion price of approximately $138.38 per share of our common stock (subject to adjustment upon the occurrence of certain specified events). |
(8) | Rate to accrete the discounted carrying value of the convertible notes to the face value over the remaining amortization period. |
(9) | We amortize any debt discount and debt issuance costs using the effective interest over the period through contractual maturity except for the 2025 CCH HoldCo II Convertible Senior Notes, which are amortized through the date they are first convertible by holders into our common stock. |
22
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
Restrictive Debt Covenants
As of September 30, 2019, each of our issuers was in compliance with all covenants related to their respective debt agreements.
Interest Expense
Total interest expense, including interest expense related to our convertible notes, consisted of the following (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Interest cost on convertible notes: | ||||||||||||||||
Interest per contractual rate | $ | 65 | $ | 60 | $ | 191 | $ | 176 | ||||||||
Amortization of debt discount | 10 | 9 | 29 | 25 | ||||||||||||
Amortization of debt issuance costs | 3 | 3 | 9 | 7 | ||||||||||||
Total interest cost related to convertible notes | 78 | 72 | 229 | 208 | ||||||||||||
Interest cost on debt and finance leases excluding convertible notes | 390 | 354 | 1,145 | 1,034 | ||||||||||||
Total interest cost | 468 | 426 | 1,374 | 1,242 | ||||||||||||
Capitalized interest | (73 | ) | (205 | ) | (360 | ) | (589 | ) | ||||||||
Total interest expense, net | $ | 395 | $ | 221 | $ | 1,014 | $ | 653 |
Fair Value Disclosures
The following table shows the carrying amount, which is net of unamortized premium, discount and debt issuance costs, and estimated fair value of our debt (in millions):
September 30, 2019 | December 31, 2018 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Senior notes (1) | $ | 20,978 | $ | 23,091 | $ | 19,466 | $ | 19,901 | ||||||||
2037 SPL Senior Notes (2) | 791 | 909 | 791 | 817 | ||||||||||||
4.80% CCH Senior Notes (2) | 720 | 768 | — | — | ||||||||||||
Credit facilities (3) | 5,260 | 5,260 | 5,294 | 5,294 | ||||||||||||
2021 Cheniere Convertible Unsecured Notes (2) | 1,181 | 1,291 | 1,126 | 1,236 | ||||||||||||
2025 CCH HoldCo II Convertible Senior Notes (2) | 1,564 | 1,792 | 1,432 | 1,612 | ||||||||||||
2045 Cheniere Convertible Senior Notes (4) | 312 | 483 | 310 | 431 |
(1) | Includes 2021 SPL Senior Notes, 2022 SPL Senior Notes, 2023 SPL Senior Notes, 2024 SPL Senior Notes, 2025 SPL Senior Notes, 2026 SPL Senior Notes, 2027 SPL Senior Notes, 2028 SPL Senior Notes, 2025 CQP Senior Notes, 2026 CQP Senior Notes, 2029 CQP Senior Notes, 2024 CCH Senior Notes, 2025 CCH Senior Notes and 2027 CCH Senior Notes. The Level 2 estimated fair value was based on quotes obtained from broker-dealers or market makers of these senior notes and other similar instruments. |
(2) | The Level 3 estimated fair value was calculated based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including our stock price and interest rates based on debt issued by parties with comparable credit ratings to us and inputs that are not observable in the market. |
(3) | Includes SPL Working Capital Facility, 2016 CQP Credit Facilities, 2019 CQP Credit Facilities, CCH Credit Facility, CCH Working Capital Facility, Cheniere Revolving Credit Facility and Cheniere Marketing trade finance facilities. The Level 3 estimated fair value approximates the principal amount because the interest rates are variable and reflective of market rates and the debt may be repaid, in full or in part, at any time without penalty. |
(4) | The Level 1 estimated fair value was based on unadjusted quoted prices in active markets for identical liabilities that we had the ability to access at the measurement date. |
23
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
NOTE 11—LEASES
Our leased assets consist primarily of (1) LNG vessel time charters (“vessel charters”), (2) tug vessels, (3) office space and facilities and (4) land sites, all of which are classified as operating leases except for our tug vessels at the Corpus Christi LNG terminal, which are classified as finance leases.
ASC 842 requires a lessee to recognize leases on its balance sheet by recording a lease liability representing the obligation to make future lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. As our leases generally do not provide an implicit rate, in order to calculate the lease liability, we discounted our expected future lease payments using our relevant subsidiary’s incremental borrowing rate at the later of January 1, 2019 or the commencement date of the lease. The incremental borrowing rate is an estimate of the rate of interest that a given subsidiary would have to pay to borrow on a collateralized basis over a similar term to that of the lease term.
Many of our leases contain renewal options exercisable at our sole discretion. Options to renew a lease are included in the lease term and recognized as part of the right-of-use asset and lease liability only to the extent they are reasonably certain to be exercised, such as when necessary to satisfy obligations that existed at the execution of the lease or when the non-renewal would otherwise result in an economic penalty.
We have elected the practical expedient to omit leases with an initial term of 12 months or less (“short-term lease”) from recognition on the balance sheet. We recognize short-term lease payments on a straight-line basis over the lease term and variable payments under short-term leases in the period in which the obligation is incurred.
Certain of our leases contain non-lease components which are not separated from the lease components when calculating the right-of-use asset and lease liability per our use of the practical expedient to combine both components of an arrangement for all classes of leased assets.
Certain of our leases also contain variable payments, such as inflation, that are not included when calculating the right-of-use asset and lease liability unless the payments are in-substance fixed.
We recognize lease expense for operating leases on a straight-line basis over the lease term. We recognize lease expense for finance leases as the sum of the amortization of the right-of-use assets on a straight-line basis and the interest on lease liabilities using the effective interest method over the lease term.
The following table shows the classification and location of our right-of-use assets and lease liabilities on our Consolidated Balance Sheets (in millions):
Consolidated Balance Sheet Location | September 30, 2019 | ||||
Right-of-use assets—Operating | Operating lease assets, net | $ | 493 | ||
Right-of-use assets—Financing | Property, plant and equipment, net | 57 | |||
Total right-of-use assets | $ | 550 | |||
Current operating lease liabilities | Current operating lease liabilities | $ | 275 | ||
Current finance lease liabilities | Other current liabilities | 2 | |||
Non-current operating lease liabilities | Non-current operating lease liabilities | 203 | |||
Non-current finance lease liabilities | Non-current finance lease liabilities | 58 | |||
Total lease liabilities | $ | 538 |
24
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following table shows the classification and location of our lease cost on our Consolidated Statements of Operations (in millions):
Consolidated Statement of Operations Location | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||
Operating lease cost (1) | Operating costs and expenses (2) | $ | 163 | $ | 440 | ||||
Finance lease cost: | |||||||||
Amortization of right-of-use assets | Depreciation and amortization expense | 1 | 3 | ||||||
Interest on lease liabilities | Interest expense, net of capitalized interest | 2 | 7 | ||||||
Total lease cost | $ | 166 | $ | 450 |
(1) | Includes $57 million and $150 million of short-term lease costs and $8 million and $21 million of variable lease costs incurred during the three and nine months ended September 30, 2019, respectively. |
(2) | Presented in cost of sales, operating and maintenance expense or selling, general and administrative expense consistent with the nature of the asset under lease. |
Future annual minimum lease payments for operating and finance leases as of September 30, 2019 are as follows (in millions):
Years Ending December 31, | Operating Leases (1) | Finance Leases | |||||
2019 | $ | 113 | $ | 5 | |||
2020 | 218 | 10 | |||||
2021 | 51 | 10 | |||||
2022 | 19 | 10 | |||||
2023 | 19 | 10 | |||||
Thereafter | 166 | 146 | |||||
Total lease payments | 586 | 191 | |||||
Less: Interest | (106 | ) | (129 | ) | |||
Present value of lease liabilities | $ | 480 | $ | 62 |
(1) | Does not include $1.6 billion of legally binding minimum lease payments for vessel charters which were executed as of September 30, 2019 but will commence primarily between 2020 and 2021 and have fixed minimum lease terms of up to seven years. |
Future annual minimum lease payments for operating and capital leases as of December 31, 2018, prepared in accordance with accounting standards prior to the adoption of ASC 842, were as follows (in millions):
Years Ending December 31, | Operating Leases (1) | Capital Leases (2) | |||||
2019 (3) | $ | 380 | $ | 5 | |||
2020 | 184 | 5 | |||||
2021 | 238 | 5 | |||||
2022 | 264 | 5 | |||||
2023 | 264 | 5 | |||||
Thereafter | 999 | 73 | |||||
Total lease payments | 2,329 | 98 | |||||
Less: Interest | — | (39 | ) | ||||
Present value of lease liabilities | $ | 2,329 | $ | 59 |
(1) | Includes certain lease option renewals that are reasonably assured and payments for certain non-lease components. Also includes $79 million in payments for short-term leases and $1.6 billion in payments for LNG vessel charters which were previously executed but will commence primarily between 2020 and 2021. |
(2) | Does not include payments for non-lease components of $98 million. |
(3) | Does not include $43 million in aggregate payments we will receive from our LNG vessel subcharters. |
25
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
The following table shows the weighted-average remaining lease term (in years) and the weighted-average discount rate for our operating leases and finance leases:
September 30, 2019 | |||
Operating Leases | Finance Leases | ||
Weighted-average remaining lease term (in years) | 7.1 | 18.9 | |
Weighted-average discount rate (1) | 5.3% | 16.2% |
(1) | The finance leases commenced prior to the adoption of ASC 842. In accordance with previous accounting guidance, the implied rate is based on the fair value of the underlying assets. |
The following table includes other quantitative information for our operating and finance leases (in millions):
Nine Months Ended September 30, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | 280 | |
Operating cash flows from finance leases | 6 | ||
Financing cash flows from finance leases | — | ||
Right-of-use assets obtained in exchange for new operating lease liabilities | 189 |
LNG Vessel Subcharters
From time to time, we sublease certain LNG vessels under charter to third parties while retaining our existing obligation to the original lessor. We have elected the practical expedient for lessors to combine lease and non-lease components and since the lease component is the predominant component of each arrangement, these subleases are accounted for as operating leases. The subleases have lease terms of up to one year and many contain short-term renewal options exercisable at the discretion of the third party. As of September 30, 2019, we had $3 million in future minimum sublease payments to be received from LNG vessel subcharters, which will be recognized entirely within 2019. We recognize fixed sublease income on a straight-line basis over the lease term of the sublease while variable sublease income is recognized when earned. We recognized $28 million and $96 million of sublease income, including $5 million and $15 million of variable lease payments, during the three and nine months ended September 30, 2019, respectively, in other revenues on our Consolidated Statements of Operations.
NOTE 12—REVENUES FROM CONTRACTS WITH CUSTOMERS
The following table represents a disaggregation of revenue earned from contracts with customers during the three and nine months ended September 30, 2019 and 2018 (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
LNG revenues | $ | 1,995 | $ | 1,776 | $ | 6,142 | $ | 5,444 | ||||||||
Regasification revenues | 66 | 66 | 199 | 196 | ||||||||||||
Other revenues | 17 | (10 | ) | 53 | 37 | |||||||||||
Total revenues from customers | 2,078 | 1,832 | 6,394 | 5,677 | ||||||||||||
Net derivative gains (losses) (1) | 64 | (57 | ) | 233 | (117 | ) | ||||||||||
Other (2) | 28 | 44 | 96 | 44 | ||||||||||||
Total revenues | $ | 2,170 | $ | 1,819 | $ | 6,723 | $ | 5,604 |
(1) |
(2) | Includes revenues from LNG vessel subcharters. See Note 11—Leases for additional information about our subleases. |
26
CHENIERE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)